Market Comment 26 February 2010

Shipbuilding Capacity – a sidebar on Chinese Offshore Bases

In “Shipbuilding capacity at the opening of a new decade – Where are we?” (29 December 2009), we mentioned that forward capacity for shipbuilding could also facing further expansion thanks to enormous surge in offshore bases to be undertaken in . It is of course debatable on the degree of effective substitutability there is for shipbuilders to enter the offshore arena, but we have seen a number of Chinese shipbuilders tackle the offshore arena, taking on offshore asset contracts without fear. We could confidently say that with new dedicated offshore players cropping up in China, this will not be positive news for the credentialed shipbuilders in China that have dreams of entering the offshore arena to offset softer demand on the shipbuilding side.

What we do also know is that the planned new facilities where we have obtained specifications for drydocks or skidways amounts to 548,918 sqm, an enormous scale. The confirmed reserved landmass is 19,215,310 sqm.

This market comment provides a tabular summary of 19 new bases that are recently completed in past several years or underway (see the table below). The list changes on monthly basis, but we are maintaining the offshore builder details and orderbook in our sister website Worldyards Offshore.

The table shows, a fair number of these bases are run by Chinese oil majors, (following the Chinese conglomerate tradition of business expansiveness). In fact, there are far more un-related assets under the same group in terms of horizontal sprawl than vertical integration between oil major/offshore contractor end-users where they fabricate the assets that they use in their business. This is nothing new; for instance, oil major CNPC has over 200 big hotels scattered all over China. These in-house facilities focused on offshore will make sure that the facilities set up by genuine offshore builders for third- party business will have a hard time each and every time a project is tendered.

These new offshore bases represent “theoretical capacities” as often the possibility of actually delivering a unit is remote. The Liaohe facility at Panjin (No.2 on the list) is a vast area with only a few blocks built. It is in the midst of arbitration with its Norwegian contractor. We will keep a close eye on their development. Yet, we should note that on the merchant shipbuilder side, actual completions of shipbuilders and indeed ships as well exceeded expectations – though to be sure, there are numerous cases of delay and other problems. No doubt this will be repeated in the offshore arena.

The Worldyard’s criteria for including merchant shipbuilders into the list of active shipbuilders, has always been fairly disciplined. We only include shipbuilders that have signed contracts for orders, confirmed financing and regulatory approval. The attached list for offshore is compiled against much more liberal criteria (for instance as far as we know STX Dalian facilities has yet to receive approval from the central authorities even though it has been completed), yet, we feel that it is a valid representation of the hopefuls. Also, considering the shareholder firepower of many (actually most) of the offshore bases, we think that they will be built.

Market Comment 26 February 2010

Chinese Offshore Bases under Construction or Recently Completed

Start of Facilities Yard Offshore builder Offshore yard Ownership first project Location Area (sqm) Length Width Area No Remarks at yard (m) (m) (sqm) 3,000 tonne n/a n/a - CCCC Tianjin Dredging skidway CCCC BOMESC CCCC BOMESC Marine Co., Ltd. and Bohai Oil 6,0000 tonne 1 Marine Industry Co., 2010 Lingang, Tianjin 700,000 n/a n/a - Industry Co., Ltd Marine & skidway Ltd Supply Co., Ltd 12,0000 tonne n/a n/a - skidway China Shipping China Shipping Industry 2 Industry ( China Shipping unspecified Shanghai unspecified - - - - Changxing) Semi-submersible CNOOC Qingdao Qingdao, 3 2006 1,200,000 420 110 46,200 dock (depth: CNOOC-Offshore Oil Offshore Base Shandong Prov. 13.90m) Engineering Co., Ltd. CNOOC CNOOC Zhuhai (COOEC) Gaolan Port, 4 Deepwater 2010 2,950,000 - - - 1,340 m coastline Guandong Prov. Engineering Base drydock (depth: 170 120 20,400 COSCO-Qidong 2009 Qidong, Jiangsu 14.3m) Cosco Shipyard Group 5 Cosco Group 2,000,000 Offshore Base (phase 1) Prov. 350 110 38,500 slipway 350 80 28,000 slipway drydock, area is CSSC Guangzhou CSSC Guangzhou 6 CSSC 2009 Longxue Island 500,000 360 96 34,560 aprproximation of Huangpu Longxue Huangpu Longxue 1.13m sqm total Dalian Dazheng Dalian Dazheng CSIC, Dalian Port Group 7 2011 Dalian, Liaoning 300,000 n/a n/a - Shipbuilding Shipbuilding & Cosco Group 2007 180 120 21,600 drydock Dalian Shipbuilding Dalian Shipbuilding (phase 1), Dalian, Liaoning 8 CSIC 600,000 120 96 11,520 slipway Offshore Offshore 2009 Prov. (phase 2) 70 80 5,600 slipway 201 64 12,864 20,000 dwt slipway Liaohe Petroleum Liaohe Petroleum Panjin, Liaoning 201 64 12,864 20,000 dwt slipway 9 CNPC 2008 2,100,000 Equipment Company Equipment Company Prov. 210 84 17,640 30,000 dwt slipway 210 84 17,640 30,000 dwt slipway Market Comment 26 February 2010

Lingang Offshore & Lingang Offshore & Lin Gang, 10 CSSC 2010 1,000,000 n/a n/a - Marine Co., Ltd. Marine Co., Ltd. Shanghai Blue Island Nantong Blue Island Qidong, Jiangsu 11 Brian Chang and others 2012 (est) 384,803 n/a n/a - Offshore Offshore Prov. RSHI Offshore Rongsheng Heavy Nantong, Jiangsu 12 Engineering Rongsheng 2011 430,000 580 139.5 80,910 Industry Prov Production Base STX (Dalian) Marine STX (Dalian) Marine Dalian, Liaoning 13 STX Group (Korea) 2009 453,378 460 135 62,100 14 m deep drydock Engineering Engineering Prov. Shanghai Zhenhua - Changxing Island, 14 2011 1,220,000 n/a n/a - multi-use Shanghai Zhenhua Heavy Changxing Base Shanghai ZPMC Industries, ZPMC Shanghai Zhenhua - Nantong, Jiangsu will switch to 15 2011 1,800,000 n/a n/a - Nantong Base Prov offshore Wison (Nantong) Nantong, Jiangsu 16 Heavy Industry Co., 2006 520,000 290 68 19,720 drydock Prov Ltd Zhoushan Wison Wison Group Holding Private businessman Hua Zhoushan, 17 Offshore & Marine unspecified 957,129 400 39 15,600 drydock Limited Bangsong Zhejiang Prov Engineering Co.,Ltd Taicang Wison Taicang, Jiangsu 18 Offshore & Marine unspecified 900,000 400 120 48,000 drydock Prov. Engineering Co.,Ltd Qingdao Wuchuan 300,000 dwt Wuchang Shipbuilding Qingdao, 19 Heavy Industry Co. CSIC 2009 1,200,000 480 115 55,200 drydock (depth: Industry Shandong Prov. Ltd. 13.5m) Total are of known Total area of bases (known) 19,215,310 548,918 facilities

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Market Comment 26 February 2010

For the traditional shipbuilders of CSSC and CSIC, they have created three champions, namely Guangzhou Longxue, Dalian Offshore and Shanghai Lingang (a subsidiary of Shanghai Waigaoqiao). Dalian and Shanghai Waigaoqiao have the longest pedigree in the offshore sector with Dalian very early on building hulls for floaters even in the 1980s, while Shanghai Waigaoqiao actually completed an FPSO before it delivered its first Capesize ship in 2003. To date, SWS has completed three FPSOs. It is also holding one of the most advanced offshore orders from CNOOC to build a sixth generation semi- submersible drilling unit "Hai Yang Shi You 981" which is one of key national "863" Programs and is the first DPS-3 deepwater semi rig ever built in China. This rig to be classed by ABS and CCS is capable of operating in South China Sea, West Africa and South East Asia, with drilling depth up to 10,000 m and operating water depth up to 3000 m.

COSCO Shipyard Group is conducting offshore activities at its Dalian (FDPSO) and Nantong yards (floaters and cylindrical drillers and floaters). COSCO Shipyard is also building a new yard at Qidong.

The scale of ambition is greatest for the CNOOC Offshore Engineering, which had long operated out of its base in Tanggu (near Tianjin), then in 2006 completed a massive base in Qingdao, and will add a 3m sqm facility in Zhuhai.

CNOOC describes the Zhuhai as playing “a significant role in advancing the implementation of the strategy of shifting from shallow water to deep water by CNOOC, building Zhuhai into a center of deepwater oil & gas field development and a center of deepwater engineering construction in China, guaranteeing national energy safety and promoting the economic and social development of Guangdong and Zhuhai.”

With such an energy security and economic development agenda, there is little wonder that there is a green light for the 3m sqm Zhuhai project.

Yet the offshore lure is even as strong for private-controlled newcomers, such as Wison Heavy and others. The chairman of Yangzijiang Shipbuilding has also declared his ambition to push into the offshore sector and we also know of other privately held yards with similar hopes. Of note, Singaporean Brian Chang who was the founder of Yantai Raffles has confirmed that he involved in a new start up in Nantong. The world’s leader ZPMC has also thrown its hat into the offshore ring last year when they agreed to build the hulls for a long-series of rigs for Iranian interests. The inaugural ZPMC contract reportedly has gotten bogged down in disagreements over design and there are management changes at ZPMC as well.

As with ambitions, there is seemingly no shortage of funding.

On Christmas Day (25 December 2009), a loan syndicate, led by China Development Bank Corporation and composed by China Citic Bank Corporation Ltd Branch, and Bank of Communications Nantong Branch, provided Jiangsu Rongsheng with RMB2.15 bn ($300m) medium and long term loans for the construction of RSHI Offshore Engineering Production Base. The 8-year loan will fund the 430,000 sqm site that will be built over two years and put into operation in May of 2011.

Market Comment 26 February 2010

There is an enormous uphill climb for China to master the offshore arena. To date, its accomplishments have related to building hulls (rather than integrated topsides) but this is gradually changing. Some FPSO hulls are completed in Singapore, but China does build integrated FPSOs for its own account. The deepwater floater at Shanghai Waigaoqiao will be a major accomplishment. CNOOC’s Qingdao base has also delivered an FPSO conversion to BHP, while COSCO Shipyard is also doing FPSO hull work for foreign buyers.

We have noticed that Chinese offshore yards (Wison, Yantai) are also buying foreign offshore design houses, in an effort to indigenize the offshore process. There will be a sharp learning curve going forward. To date, Chinese offshore accomplishments have been either for domestic buyers or for asset players, who want to charter assets to oil majors. Domestic buyers are always more forgiving than foreign buyers. Likewise, asset players will also be as accommodating as possible as they rush to get meet their charter obligations to offshore buyers. The real test will be when China increases it footprint in the direct contracting to oil majors and the international marine contractors, both of which are extremely demanding clients.

As a footnote, or rather an entirely new chapter in offshore, CSSC is also planning to develop a shipbuilding and offshore base on Hebao Island, at Gaolan Port, Zhuhai. The land area is 1660 hectares with a quay of 9,000 m where eight docks will be built (four to be developed as the first phase). CSSC has clearly stated to forge offshore into a pillar industry of the company in coming five years. The 4796 m long breakwater of the first phase is under construction and expected to be completed in mid 2010.

The scale of this 16.6m sqm Gaolan project is almost equivalent in scale to the entirety of the above 19 projects. The Gaolan base will comparable with CSSC's efforts developing Changxing Island. For quick reference, the CSSC site has 8 km quayside in Changxing Island and in Gaolan, it has 9 km quay. We can expect that CSSC Gaolan project will be included in the 12th five-year plan of Zhuhai or Guangdong Province.

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